Friday, March 13, 2009

NRUC, whose $1.5 billion credit facility matured today, managed to roll the facility into a new $1 billion 364-day facility expiring on March 12, 2010, via a consortium of 12 banks. The changing bank landscape is obvious when one considers that Bank of Nova Scotia and RBS are co-lead arrangers and joint book runners instead of traditional go to secured lenders. The interest on the facility was not disclosed but as the company warned on its January 22 earnings call, it likely came at worse terms than the previous facilities. What is curious is that the facility represents a reduction of $500 million to the existing bank agreement it replaces, even lower than the worst case scenario of $1.1-$1.2 billion the company had expected, again as disclosed on its January earnings call. And, of course, the same maintenance covenant conditions apply as Zero Hedge noted previously, including a maximum leverage and a minimum TIER covenant (the latter being the one which we believe the company could be precariously close on when it announces its next earnings on April 9).

Another odd development is that the company had reduced its CPFF borrowings from $1.1 billion to 0, as it "has achieved the funding it needs from other sources, including member and dealer commercial paper, at lower costs."

One additional oddity arises upon listening to the company's January earnings call (replay #: 877 919 4059, pin: 56664948). At approximately 29 minutes 45 seconds into the call a John DiAntony (sp) from Network Technologies asks a pointed question about potential RICO (Racketeering Influenced and Corrupt Organizations Act) litigation against the company to which Steven Lilly gave a terse and angry response that the caller is "probably on the wrong call." Upon some further diligence, it seems that Mister DiAnthony was on the right call, however his question may have been one that the company had no desire to answer.

A little background: some time ago Jeffrey Prosser, who used to be the owner of now defunct Innovative Communications Corp, and to which NRUC had lent substantial money ($485 million outstanding at November 30 and against which NRUC recorded a $126 million loan loss provision in the three months ended November 30 as ZH previously reported) had filed a lawsuit in which NRUC (and surprisingly David Einhorn's Greenlight Capital) were named as defendants. Prosser himself is the target of two lawsuits filed in District Court in the Virgin Islands by Stan Springel, the trustee overseeing the bankruptcy of ICC in which Springel "has identified about $60 million in non-business transfers of property to pay for the Prosser family's luxurious lifestyle over the last decade." Based on the allegations filed against Prosser, the man has good taste: among the "transfers" itemized in the suit are:

$3.4 million for non-business purchases such as fine wines and liquors;

$3.1 million to American Express for non-business purchases including clothing, jewelry luxury goods, dining, airfare and hotels;

$984,997 for various insurance policies with AIG Private Client Group;

$757,421 for luxury clothing and jewelry from retailer Bergdorf Goodman;

$722,387 to Michael Connors Inc. art dealership;

$144,294 to Audio Advisors Inc. for audio and video products and services;

$216,416 for custom-ordered art from Aleksander Popovic Studio;

$138,000 to Sutka Productions for party planning related to the wedding of the Prossers' daughter.

And while that lawsuit is one we will be following with great attention, the countersuit filed by Prosser (and his wife Dawn) against NRUC is also of great curiosity (among others, it also names Sheldon Peterson, CEO, John List, GC, and Steven Lilly, CFO, Greenlight Capital, Ernst & Young and Deloitte & Touche as defendants) which presents a variety of serious allegations against the company including:

Accounting Fraud;

Mail & Wire Fraud;

Racketeering;

Embezzlement;

Money Laundering;

Defalcation;

and a variety of other charges. While it is feasible that Prosser's countersuit against National Rural is merely an attempt to deflect attention from the company's allegations against himself, a close reading of the amended RICO suit filed February 9, which Zero Hedge has obtained, indicates that Prosser does have an intimate familiarity with the events and operations at NRUC and at first glance is likely worthy of some credibility.

Either way, we present the Prosser suit in its entirety here, as we believe that this situation promises to be even more interesting going forward and we intend to follow its mudslinging development very closely in the coming months.

If one looks closer at the bankruptcy court documents the trustee suit against Prosser is odd. For 10 years he never took a salary but a draw through a contra-equity account which shows up on the audits of ICC as a negative equity account. So he is bing sued for all draws/compensation he took for a 10 year period. It's even stranger since according to documents filed he and his wife owned 100% of ICC. The trustee has not even alleged that the amounts weren't recorded properly in the books of ICC and audited by BDO yearly. RTFC the only lender sued ICC and Prosser in 2004 for 31 alleged non monetary defaults' which 26 of them were dismissed on summary judgement, and never sued for misuse of corporate funds. In fact signed a release in 2003 with ICC and Prosser. Seems like a smoke screen. The RICO claims are all backed up by CFC public documents. Let us not forget that while attacking prosser so far the trustee and his advisors and lawyers have been paid 29M and are still owed 15M. At the same time RTFC turned down in 2007 422M from Prosser net to them. The Court records tell a story of CFC costing itself 450M to destroy Prosser. He must know what could bring them down. I look forward to the next move. Maybe the SEC will be ahead of a complete loss if it moves in time.

According to Court documents and press stories RTFC turned down 422M net to itself in 2007. The highest bid according to reports was gross of 185M. Because of internal debt and pref. stk. at VITELCO RTFC would net zero. In reality RTFC should charge off the full 475M loan but they can't because it would eliminate most of it's equity and put it in default of all of it's loans. So that is why they have credit bid last Friday for 250M. This is the same type of accounting fraud they used in reporting COSERV a Texas electric coop. In that case COSERV's audit reports the loan to CFC 300M less than CFC carries it on their books. According to Court Doc's ICC had a firm binding commitment from Silver Point that could have been closed in Dec. 2007. The commitment was for 620M. Also troubling the same law firms from Texas that represented ENRON are involved in this case. The same people are attacking Egan Jones. Arthur Andersen was CFC's auditor also. Maybe we now see why they want to keep Prosser's mouth shut.

real answer is net book value of distressed writeoff of theI CC loans are 100% geiven preferredstock and and RUS at he operatining companh of Vitelco

However,more mindblowing is the fact that the RTFC and RUS has carried on this intrmixing of accounts betweene RTFC and the CTC. Bottom line: ICC loan is close to $500B, yet debt closest bid was be at $150B. Problem is their are another $150 senior positions, including taxes, corp. savings plans,and other., in front of ICC's senior debt at Vitelco. This rusults in Obout $0 value or RTFC debt.

with the obligations at ICC approaching $185mm, and EBITDA of the companies at about $45mm, th value of ICC"s shares are worth $0 in today's market. The problem is how does ICC work wtih Vetelco (read: all value) to not put Vitelco into BK?

THis is a crappy situation as all the other stakeholders (read: customers) will get screwed over the next 5 or more years to work this mess out. Maybe even longer if CFC has issues.